UK consumers did not have a good Christmas and, since consumption is the main component of aggregate demand, this is a serious problem for the UK economy and for retailers in particular who rely on high spending at Christmas. Furthermore, not only was consumption lower than hoped for by retailers, it has also been financed by significant increases in household borrowing (see Mr Dean’s recent post). According to the British Retail Consortium, the retail sector experienced their worst Christmas since the financial crisis in 2008 with sales which were basically the same as last year. They reported that, although spending on groceries was higher than last year, spending on other categories such as clothing, were lower. Barclaycard confirmed this when they reported a real terms fall in consumption in December of 0.5%
There are a number of possible causes for low consumption. In the past, we would have looked at what has happened to consumers’ real income. However after many years of falling real incomes, last year incomes started to increase at a faster rate than inflation so this is no longer a factor. More likely is a fall in consumer confidence as doubts about the future of the UK economy increase as progress towards Brexit falters. There have also been declining car sales with new car registrations falling 6% in 2018 compared to 2017 caused by Brexit uncertainty and a fall in the attractiveness of diesel cars. There has also been a fall in spending on recreation and travel. Not only have foreign holidays become more expensive as sterling has dropped in value, consumers have cut back on meals out, recreational activities and travel.
But possibly not all is not doom and gloom. Part of the reason for the fall in December spending was people buying more in November to take advantage of ‘Black Friday’ offers. However this was not good news for retailers in the high street since many of the ‘Black Friday’ purchases were on line. This might mean that there will be more stores following Maplin, Toys R Us, Carpetright, HMV, Poundworld and House of Fraser.